Michael A. Gayed, CFA, winner of the 2014 Dow Award and 3rd Place Wagner, is chief investment strategist and co-portfolio manager at Pension Partners, LLC., an investment advisor which manages mutual funds and separate accounts according to its ATAC (Accelerated Time and Capital) strategies.... More

Most market averages experienced their worst decline in 2012 last week, as concerns over U.S jobs growth, coupled with fear over the outcome of France's elections kept investors jittery. Countering this was manufacturing data which continues to steadily improve, alongside stable yields in Italy and Spain which are not signaling a renewed period of panic in European debt markets. In addition, while Quantitative Easing 3 (QE3) and another round of Long-Term Refinancing Operations (LTRO) may be off the table, Australia reminded the world that monetary easing is not just a U.S. and European policy, as the RBA cut rates aggressively. It is worth noting that although Spain's equity markets have utterly collapsed in recent weeks, U.S. stocks continue to act in a resilient fashion.

I recently wrote a piece on Friday for MarketWatch which I think is important to consider for investors. There is a "Bear Paradox" happening (http://www.marketwatch.com/story/the-bear-paradox-and-the-negative-narrative-2012-05-04?link=MW_TD). This idea is simple here. If you are very bearish on stocks, then you likely have to assume that another "flight to safety" wave happens into Treasuries. Yet, bond yields are (once again) at panic low levels. A big correction likely would send these yields even lower, which paradoxically makes stocks only more attractive on a comparative basis. I maintain the idea that stocks can have a surprisingly large move, similar to 2003 and 2009 given that the crowded trade appears to be in "risk-off" investments.

Speaking of risk-off, our ATAC (Accelerated Time And Capital) models remain in defense mode, allowing us to perform nicely last week relative to broader market averages. Conditions have undoubtedly deteriorated in the very near-term, but not in a way indicative of a major decline to come. I noted in some of my prior writings that the "mini-correction" may not be over just yet. Market reaction to Francois Hollande in France winning the Presidential seat likely will be important to pay attention to. If the debate turns away from both austerity and government borrowing, and instead focuses on creating favorable conditions for growth to occur (primarily through regulatory and structural changes), then it is entirely possible investors put money back to work into Europe.

The long-term is made up of a series of short-terms. Our models are run weekly to react to altering market dynamics, all within the context of what we intellectually and analytically believe could be a big year for stocks. If markets once again prove their resiliency in this period of volatility as they did last month, it once again furthers the case for the Spring Switch out of bonds and into stocks is a high probability scenario. I have stated numerous times that predictions are meaningless unless one understands the conditions one is operating in. And since the crowd sets price, crowd expectations which favor inflation means at some point, higher stock prices will likely be chased to ever higher highs out of fixed income investments.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing

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